(This is a guest post from the author’s blog.)
“The 20th century has been characterised by three developments of great political importance: The growth of democracy, the growth of corporate power, and the growth of corporate propaganda as a means of protecting corporate power against democracy.” Alex Carey
The strategy of the Bernanke Federal Reserve and of the Obama Administration’s economic team is fairly clear: prevent the bank failures of the 1930’s by propping up the biggest banks with huge infusions of publicly subsidized capital, and hope that they start lending again as the economy recovers. It is a variation of the ‘trickle down’ theory of economics applied to the perceived policy errors of the first Great Depression.
Bernanke is famously a student of that economic event, even as General Joffre, the architect of the Ligne Maginot, was a student of the first World War. And Larry Summers seems remarkably similar to Marshal Pétain. Timmy is a student of nothing, not even of the tax code he adminsters apparently, except perhaps the art of the useful manservant, a valet.
Failure number one of course is that the banks that they chose to support are not responsible banks engaged primarily in lending to small business and localised activity. Those banks are the local and regional banks and they are failing in record numbers. The banks they chose to save are those who have heavily contributed to the campaign coffers and job prospects of Washington politicians. Goldman Sachs, for example, is a glorified hedge fund dedicated to speculation and enormous amounts of leverage. One only has to look at the source of their profits to understand what it is that they do.
Bernanke has (so he thinks) cleverly tied up much of the liquidity with which he has infused the banks as reserves which are paying riskless returns thanks to his innovation in sustained a floor under the ZIRP. But if you look at what he is doing, all Bernanke has done, even in his buying a trillion dollars of bad mortgage debt, is rescue creditors who engaged in reckless speculation during a housing mania that the Greenspan Federal Reserve had fostered.
The lack of productive investment and genuine stimulus for the real economy is appalling. Bernanke and his colleagues Larry Summers and Tim Geithner would have us believe that they had no choice. But informed and experienced commentators such as William K. Black have told us how they have misrepresented their choices. Their current path seems to lead to a ‘zombie economy’ at best, in which the Banks are doing well, but almost everyone else suffers, particularly the lower and middle classes who obtain their income from the real economy. At worst, the bubble bursts again, and there is another leg down, with greater damage done.
So what would have worked? The Fed and Treasury could have backed the public instead of the banks. They could have temporarily increased and extended the FDIC coverage to much higher levels to guard against further bank runs, and then started dismantling the Wall Street banks through orderly liquidations. They needed no new laws or tools to do this. And financial reform and higher taxes on those who obtain outsized wealth without productive work would have curtailed a recurrence.
So why did they do what they did? Are they in league with the banks? Was this some sort of conspiracy? No, I doubt this, although there are far too many secretive aspects to completely dismiss it.
None of these men have ever held a real economy productive job in their entire lives. They were always the pampered products of the academy, Wall Street, and the government.
So they took care of their own, because that is their world view. It has been said that the Federal Reserve is the worst place to locate certain aspects of banking regulation, because they have a complete aversion to ever allowing a bank to fail. It runs against their nature. And couple this with a career experience in which the world is viewed through the lens of cost plus management, and privileged power, and their inability to make the tough decisions seems more understandable.
And the promise of future positions, and large amounts of lobbying money to their friends and mentors and sponsors, and the policy error that is ruining the country seems more understandable.
So now we have another asset bubble in the making, a new Ponzi scheme in the US equity market fomented by the Wall Street Banks packed with public funds, seeking to drive prices higher, for the apparent reason of obtaining confidence from the public, but with the effect of selling assets at inflated prices to public institutions yet again, with the inevitable collapse to follow when the reality of their value is discovered.
What a shame. What a disappointing performance for a reform government that promised change that the people could believe in.
“…surveys show that the usual investors in major rallies – pension funds, hedge funds and retail investors – have not been net buyers of equities. And he says the most likely explanation for this anomaly in the biggest stock market rally since the 1930s is that major investment banks are the anxious buyers.
“Their buying would appear to be for one of two reasons. Firstly because they think the authorities will prevail in their (so far unsuccessful) efforts to inflate their way out of debt liquidation; or secondly because they are too big to fail and so can afford to take a huge gamble that enough buying will convince others to rush in and buy their inventory of risk assets at even higher prices.”
Financial Times, Equity Rally Not Driven by the Usual Investors, Financial Times, April 28
And it should be noted that the Wall Street demimonde, the financial media, the financial commentators regulators and legislators, are widely supportive of this, because they draw they pay and employment prospects from an enlarged financial sector. So they are natural enthusiasts.
And of course there is the mainstream media, which is generally silent, or simply pleads confusion and ignorance, when things financial are discussed out of deference to their corporate owners, and the difficulties of actually engaging in investigative journalism, rather than acting as a guest host to a competitive debate among lobbyists and ideologues. It is the path of least resistance, and greatest returns. And it leads to an economy that consists of little else besides usury, propaganda, and fraud.
Why be negative? Better to be playing safe while the New Rome burns.
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